Today, Short-Term Interest Rates in Australia Are 8

question 15

Multiple Choice

Today, short-term interest rates in Australia are 8.50% and the corresponding U.S.rate is 6.0%.The current discount on forward Australian dollars is 2.0%.Can a U.S.trader use covered interest arbitrage to take advantage of this situation? If so what is the net effect?

• A)No.Lose 1/2%
• B)No.Lose 2 1/2%
• C)Yes.Gain 112%
• D)Yes.Gain 2 112%

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Definitions:

Need For Achievement

A psychological trait that drives individuals to pursue and attain challenging goals, often with a significant emphasis on excellence and overcoming obstacles.

Homeostasis

The dynamic process through which biological systems maintain stability and optimal internal conditions despite external changes.

Drives

Basic, innate urges that motivate behavior, such as hunger or thirst.

Cognitive-Mediational Theory

A theory in psychology that proposes our emotions are determined by our appraisal of the stimulus, suggesting that thoughts mediate between stimuli and emotional responses.